Hello, my name is Matthew Taylor and I am the Business Development Director here at Equilaw. Today, I am joined by Malcolm Emery of Legal Studio Solicitors. Malcolm is a solicitor and chartered tax advisor who specialises in tax, trust and probate matters.
In today’s podcast Malcolm is going to provide some practical guidance on equity release applications made by a single applicant on property previously owned with their spouse or partner, who will continue to occupy the property.
Malcolm, we occasionally review equity release proposals on properties owned by married/unmarried couples or couples in a civil partnership, but the application is made by only one of them. The reason for this will vary but usually it relates to the owners’ personal circumstances. Could you please explain what steps need to be taken for the equity release to be proceedable?
Although these types of situations are not very common the most important point to note is that the application cannot proceed unless the property is transferred into the sole name of the applicant. This in turn raises a lot of issues for the spouse or partner to consider and the lender will insist that they receive independent legal advice before assigning away their interest in the property. Initially, the spouse will need to decide whether the assignment of the property is going to be a gift or a sale.
The first issue for the spouse to consider is that they are giving up their legal right to live in the property. As a co-owner of the property the trusts of land and appointment of trustees’ act 1996 gives them the legal right to occupy the property, alongside their partner or spouse. This right is lost when they assign their interest in the property away, although a married woman would still have rights to live at the property. These are known as matrimonial home rights under the Family Law Act 1996. There is no protection under these rights unless the rights have been registered against the property at the Land Registry. However, the Lender will not normally agree to the rights being registered, as they act as a charge against the property and the terms of an equity release mortgage will usually provide that no other charges can be secured against the property.
The second point to consider is tax. There are two taxes to consider, namely capital gains tax and inheritance tax.
A gift from one spouse to another spouse is deemed to take place on what is known as a “no gain and no loss basis” This means that the spouse who is acquiring the interest in the property is deemed to acquire it for the same cost as their spouse paid for it.
For inheritance tax purposes gifts between spouses are usually exempt from IHT.
If a couple are not married, then a different set of tax rules apply. For capital gains tax purposes the partner assigning their interest in the property is deemed to receive full market value for their interest, even if they are gifting it or selling it at an undervalue. If the property has increased in value since the date that they acquired it then the difference between the two valuations is the capital gain. However, if they have occupied the property as their main residence throughout any capital gain would be covered by a relief known as principal private residence relief, which makes the gain exempt from tax.
If the interest in the property is given away then this is treated as a potentially exempt transfer for inheritance tax purposes. This means that the gift will fall outside of the inheritance tax net if the person making the gift lives for a further seven years, otherwise the value of the gift is added back into their estate to determine any charge to inheritance tax on their death.
If the person making the gift has financial difficulties at the time the gift was made, then this could attract the attention of the trustee in bankruptcy if they subsequently became bankrupt. Therefore, it is usually good practice for the individual making the gift to sign a declaration. at the time the gift is made, to confirm that they are solvent.
The threat of divorce should also be considered if the co-owners of the property are married and they subsequently divorce, as there is always a risk that they may not recover a 50% interest in the divorce settlement.
The final point to consider is how the cost of any residential care required in the future would be funded. Following the gift of the property the spouse may not have sufficient funds to pay for that care. If this were to happen then the Local Authority could argue that they have intentionally deprived themselves of assets to avoid paying for that care. If the Local Authority were successful with this argument then the spouse who has made the gift would still be treated as owning their interest in the property, for the purposes of pay for their own residential care.
For the Local Authority to be successful with such an argument they would need to establish that (1) a reason for the spouse making the gift was to deprive themselves of assets to avoid paying for residential care and (2) at the time the gift was made there was a foreseeable need that the spouse would require residential care in the future.
Wow, thank you Malcolm that was really well explained thank you. Moving on, I understand that the spouse making the gift will need to sign an occupier waiver form. Could you please explain what an occupier waiver form is and what protection (if any) does it provide?
An occupier waiver form is used by a lender when a mortgage is granted on the property. It has to be signed by anyone over the age of 17 who is to live at the property but is not a party to the mortgage. Should the borrower default on the mortgage, the waiver means that the lender may repossess the property and evict all of the occupants.
As this is a very important document the lender will want to ensure that the occupier is fully aware of the terms of the consent that they are giving. To evidence this the mortgage lender requests that each occupier seeks independent legal advice before signing it.
Thank you, are there any other longer terms consequences that the spouse needs to think about before assigning their interest in the property to their spouse?
Yes, before assigning their interest in the property they should consider what will happen if their spouse or partner dies before them. If the mortgage application was made in joint names and one of them dies during the term of the equity release, the lender will allow the surviving spouse to live in the property until they die or go into permanent residential care. The term only ends when both owners are no longer living at the property. However, in the situation where the mortgage is in their spouse’s sole name the lender will require that the mortgage is repaid on their death, which could mean the surviving spouse will lose their home. Therefore, it is important that adequate provisions are included in the first spouse’s Will to protect the surviving spouse. Which may include that the property, subject to the equity release, is left to the surviving spouse.
The surviving spouse may decide to sell the property, repay the mortgage and use the proceeds to buy a new property. Consideration should also be given whether there would be sufficient funds to buy a suitable replacement property for the surviving spouse after the equity release has been repaid. If not, then consideration should be given to putting adequate life insurance in place, if this is not too expensive. Another option is for the surviving spouse to re-mortgage the property so that they can continue to live there.
Great, thank you Malcolm, this has been very informative and I am sure will benefit our advisers and clients. As a last question, is there anything else that the owner of the property needs to consider?
Yes, they should consider putting a property & affairs lasting power of attorney in place. This will enable decisions to be made about their financial affairs if they lose capacity and are unable to do this for themselves. This is very important if the equity release has a drawdown facility attached to it. As the application process for the registration of the lasting power of attorney can take over 3 months to complete, this matter should be given immediate attention.
